Hungary's benchmark stock index and currency plunged as investors pulled out on concern the eastern European country may be the next to be engulfed by the financial crisis that has battered the Icelandic economy. The BUX index fell 11.9 percent and the forint slumped as much as 6.7 percent against the euro today. The stock market is the world's worst performer in euro terms today, while the currency fell more than any other except the Paraguayan guarani. The global financial crisis is hitting more vulnerable emerging markets as investors withdraw from riskier assets in a flight to safety. Foreign currency borrowing by Hungarian consumers and businesses, along with a slower growth and wider budget deficit than elsewhere in eastern Europe, make the country a target, economists said. ``Hungary is the weakest link in the region,'' said Esther Law, a strategist at Royal Bank of Scotland Group Plc in London. International investors holding the country's bonds may also make the market more vulnerable, she said. The forint traded at 267.24 per euro at 4:57 p.m. in Budapest, compared with 253.75 late yesterday. OTP Bank Nyrt., the nation's largest lender, fell 667 forint, or 15 percent, to 3,784 forint. Hungary, Iceland and Ukraine are the only European countries that turned to the International Monetary Fund for help during the crisis. Ukraine, Hungary's eastern neighbor, asked for the IMF's ``systemic support'' and ``active cooperation'' after it was forced to take control of a local lender and the central bank doubled the amount of money it injected in the banking system. Hungary's 2 percent annual economic growth in the second quarter compares with rates of 9.3 percent in Romania and 5.8 percent in Poland. The budget deficit was 5 percent of gross domestic product last year, compared with 1.6 percent in the Czech Republic and 2.2 percent in Slovakia.
Hungary lined up potential funding from the IMF this week as a ``last line of defense'' after what Prime Minister Ferenc Gyurcsany called a ``significant and strong attack'' against local markets. ``There are market rumors, linked to the IMF agreement, that Hungary may be next after Iceland,'' said Daniel Bebesy, an economist at Budapest Investment Management. ``There isn't much basis for this but when there is panic, a rumor is enough to cause a lot of damage.''
Hungarian assets are being sold off even after government officials and analysts said that the banking system is stable and the country reduced its external vulnerabilities. The government has cut the budget deficit from a record 9.2 percent of GDP in 2006 to a planned 3.4 percent this year and pledged to meet all euro-adoption terms next year. Iceland's financial system has imploded, precipitating the collapse of the currency after the country's three largest banks amassed $61 billion of debt. Iceland's Prime Minister, Geir Haarde, said yesterday the country won't default on its state debt. Stocks fell 77 percent yesterday. While it's more vulnerable than many eastern European neighbors, the Hungarian economy is more stable than Iceland's, said economists including Charles Robertson at ING Groep NV in London. Foreign ownership in most of the country's lending system allows helps avert any possible problems, he added. ``Concerns are probably overdone for Hungary,'' Robertson wrote in a note to clients today. ``We have always shown Iceland on the same charts as others, but only as an extreme outlier, not as a warning to other countries. Ratios in Ukraine and Hungary are generally far safer.''
In Hungary, private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, while short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland, according to Richardson.
Oesterreichische Volksbanken AG's Hungarian unit has suspended Swiss Franc and U.S. dollar loans. It will continue to lend euros it has in reserves. Bayerische Landesbank also suspended new foreign-currency loans. ``There is concern about the banking system and over how much people have borrowed in euros and Swiss francs to finance mortgages and personal consumption,'' London-based RBC Capital Markets economist Nigel Rendell said.
Still, the current slide in Hungarian assets was ``exaggerated'' because of the panic in world markets, he said. ``We're not really living in a rational market. It was driven by greed for years and now it's driven by fear.''